Welcome back to the blog!
In addition to working with clients on investment and wealth management, I write a quarterly blog on tax tips and tidbits.
However, in this edition, I’m going to deviate from the typical quarterly release and write on a topic that is not primarily tax focused.
A Little Historical Context
In years past, it wasn’t uncommon for Canadians to hold a collection of disjointed investment accounts at multiple institutions.
It was easy for this to result over time - there was the account opened after college, the group RRSP from a former employer, the shares inherited from an aunt or uncle, some mutual funds and ETFs scattered with a few different advisors and perhaps a handful of GICs at a local bank or credit union.
Conversely, for other individuals it didn’t simply happen this way, it was the result of a belief in the old adage “don’t put all your eggs in one basket” as a means to theoretically spread out risk, thinking that if one advisor performed poorly, perhaps they could be balanced out with the success of the other.
In either situation, I’d argue that the overall resulting portfolio is often unwieldy, difficult to manage, daunting to organize, and creates a scenario where it is nearly impossible to ensure that a client is actually investing according to any sort of personalized plan.
Today, the times are changing as there is now a growing trend among high-net-worth clients towards working with a single advisor (Capgemini World Wealth Report), as clients are recognizing the benefits of bringing assets together under one umbrella with a focus on holistic wealth management.
lt might sound self-fulfilling for advisors to preach the virtues of consolidation, however, bear with me, as I’ve outlined my rationale and top 5 reasons below for why consolidating investment accounts with one advisor is beneficial for a client and just makes sense.
Savings on investment management costs
I’ll start with investment management costs, as it seems you can’t watch the news, open the paper or surf the web without hearing about investment costs and the impact on returns.
Now I certainly agree that costs matter, and focusing on cost efficiency in our client relationships is important to ensuring that we deliver consistent net returns to help build a client’s long term wealth.
In the industry, most advisors typically charge a cost that is based on a percentage of the total investments under management. The cost is structured on a sliding scale, meaning that the more a client invests in one place, the lower the annual percentage. Therefore, investing among multiple advisors loses this economy of scale and dilutes a client’s ability to earn a break on costs due to account asset size.
Appropriate overall asset allocation
A golden rule of investing is to ensure a portfolio is properly diversified, it is integral to reducing risk and boosting a client’s overall return over time. However, diversification is about asset allocation and how clients invest their money, not where that money is kept. Investing through multiple advisors instead of consolidating assets is actually more likely to expose clients to greater risk, not reduce it.
If you’re not convinced let me explain.
Inevitably, each advisor acts independently, not knowing what the other is doing, resulting in too much concentration in one area, duplication or redundancy in another, or an asset mix that isn’t right to help the client achieve their goals. It’s more than likely that the investments, in this case, aren’t based on any sort of personalized and comprehensive wealth plan that sets the client up for long term success.
Simplified administration and consolidated reporting
Initially, it might not sound all that important, but reviewing investment statements and interpreting performance is difficult enough, let alone from multiple advisors, each with different statements. I recently wrote a blog titled Understanding Your Investment Statements on this topic as I found that clients were commonly incorrectly assessing performance on just a single statement. It is therefore unlikely that clients have the time, inclination, or the mathematical ability to make sense of a briefcase full of statements.
In previous years, I spent long hours as an accountant in public practice at tax time, and I can say first hand that reducing the number of statements and tax slips will undoubtedly reduce tax preparation costs and help to simplify a client’s financial life.
Tax-efficient income planning
So let’s continue with the tax theme.
It is difficult to optimize tax efficiency, whether that means offsetting capital gains with capital losses, considering income splitting strategies, or assessing how to tax efficiently draw on assets for cash flow needs, without a holistic view of all investments that a client holds.
In the case of a client approaching or in retirement, consolidation is even more important. There are key decisions around government benefits, employer pensions, RRSPs, RRIFs and TFSAs that are integral to an effective retirement strategy.
A consolidated portfolio helps an advisor to make appropriate recommendations to ensure clients maximize after-tax income.
Estate administration efficiency
I’ll finish with something your legal representatives will thank you for.
A legal representative is required to locate, contact and make arrangements with advisors when settling an estate. Having assets with one advisor simplifies the administration and helps to avoid the nightmare of the forgotten account.
Now this is something I bumped into all too often in public practice when an executor walked in with a shoebox full of statements, share certificates, and a look of confusion. Inevitably it was a mess and resulted in increased accounting or legal fees, a high probability of lost assets, and headaches for the executor left with unraveling it all.
In summary, instead of multiple advisors, clients need one that they can trust, one who understands their goals, objectives, and concerns to ensure that there is the necessary clarity to put together a wealth plan to enable the advisor to ensure the client has a roadmap to long term success.
I can be reached at firstname.lastname@example.org or 604.981.6681.
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